Your Guide to Special-Situation Stocks

He’s a native New Yorker who’s made his money on Wall Street.

Joel Greenblatt is the manager of Gotham Capital — a hedge fund that boasts one of the best track records Wall Street has ever seen — and has made himself a fortune in the stock market. Famously, the fund made 50% returns per year from 1985 to 1994.

Greenblatt has also helped other investors find their own success. He teaches classes on investing at Columbia and has even written books on it, such as New York Times bestseller The Little Book That Beats the Market.

His story reminds me a bit of my colleague Charles Mizrahi.

Not only are they both intelligent investors from the Empire State, but they’ve both reaped the benefits of special situations.

As Charles shared in last week’s American Investor Today article, special situations are opportunities in the market with very few competitors. In his decades working in the markets, Charles says these are some of the best opportunities he’s ever come across.

This is because they often appear too complex to Main Street investors, and Wall Streeters simply don’t take the time to figure them out.

But they can often lead to huge profits.

How It Works

While most Main Street investors don’t even know where to start looking for special-situation stocks, those that follow Charles have no trouble at all.

In fact, he keeps an eye on several kinds of special situations, which include:

Sum of the Parts: This is a valuation method that Charles uses to value each asset or division of a company. The sum of the value for each individual asset is the price that the entire company should be trading at — but often isn’t.

Micro Caps: These companies are even smaller than the small-cap businesses Charles mentioned last week, with market caps under $500 million. With even fewer professional investors interested in them, these companies have larger price inefficiencies in their valuations.
Activist Targets: Activist investors are people who buy large quantities of stock with the goal of shaking up the status quo of a company, putting pressure on its management team and making demands that they think will benefit shareholders. Everyday investors can make huge profits by “riding their coattails.”

All of these special situations are great for investing over the long term and seeing returns … but they’re not the only ones.

And Joel Greenblatt himself claims that investors can “make a pile of money” using one special situation in particular.

It’s what led him to 1,000% gains in Liberty Media — the type of return most investors don’t have a chance to see for decades — in just two years.

To most, this special situation is a secret…

But to Charles, it’s a means by which Main Street American investors’ dreams come true. And he’s very excited about it right now.

And of all the special situations Charles follows … he likes this one the best.

We’ll be talking more about this special situation soon, so make sure to stay tuned for your American Investor Today issues over the next few weeks.

But first, we want to hear about your experiences with special situations. Have you ever invested in any opportunities like these? Do you follow any activist investors?

We’d love to hear from you! Write to us at AmericanInvestor@BanyanHill.com.

Regards,